Early Rally Could Be A Head Fake – Use Caution Ahead of the FOMC

Posted 9:30 AM ET - Yesterday the market tried to push higher on the open and profit-taking quickly set in. Stocks spent the day in negative territory and I question the gap higher this morning. Higher opens are difficult for us to trade. Relative strength is harder to spot and we don't know if the gains will hold after a big market rally last week. Consequently, I will sit out the first 45 minutes of trading. I am also noticing that it is harder to make money on longs. The rallies are not sustained and the price action is two steps forward and one step backwards. This suggests profit taking and a lower level of conviction than we saw last week. Traders will be nervous ahead of the FOMC statement tomorrow and we should expect choppy trading on light volume. The range was very compressed yesterday. If the market can't advance after an hour of trading, we will see around of selling. Bullish speculators will pile in early and they will get caught in a trap. As they exit long positions the selling will accelerate. I'm not looking for a massive decline, just choppy trading. Any meaningful declines greater than 30 S&P points will present a buying opportunity. China's industrial production and retail sales came in better than expected. Their economic activity is trending upward. Oil is challenging the high from last June. This is a major resistance level and I would be surprised if we get through. Even when oil was trading higher yesterday, energy stocks pulled back all day. This suggests profit-taking and I will be looking for shorting opportunities in the basic materials sector. Many of these stocks are up 30% plus in the last few weeks. If the early rally starts to falter, I will focus on shorts in the energy sector that have recently gone on a sell signal. Look for a tight range and quiet trading ahead of the Fed's decision. . .

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